ROI Calculator

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ROI x
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Return on Investment (ROI) Calculator

Return on Investment is one of the key terms related to business and investments. Here is a comprehensive explanation that explains all you need to know about return on investment.

What is Return on Investment (ROI)?

The main intention behind any investment is profit-making and good returns. Return on Investment (ROI) is a term that measures this efficiently.

Return on Investment is the metric that tells you how efficient your investment is. This term mainly studies the amount that you obtained in return for that you invested initially.

Return on Investment also compares different investments and their returns and helps an investor in deciding among which investment to make to obtain maximum returns.

How is Return on Investment calculated?

To find the return of investment, all that you need to do is divide the amount obtained in return of the investment with the initial cost of the investment made.

Return on investment (ROI) = (Present Value of Investment – Initial Cost of Investment) / Initial Cost of Investment

  • ROI is measured in percentage or ratio.
  • If the ROI is positive, an investor can consider the investment and go ahead with comparing with ROIs of other investments.
  • If the ROI is negative, then it implies that investors should not invest in that investment.

How ROI helps in comparing various investments?

Since ROI is measured in percentages, you can easily compare the results and check which investment if highly beneficial.

When you say ROI, do you mean return of investment or risk of inaction? – Paul Gillin

Key Points to Know About Return on Investment

  • ROI is the most oft used metric to compare and analyze investment decisions. Since it is just a ratio, it doesn’t matter in which sector you are making an investment, private, public, government, stocks or real estate. ROI applies to any type of investment.
  • Another advantage of ROI is its simplicity of calculation. An investment enthusiast can easily take investment-related decisions just with minimal knowledge of mathematics and economics.
  • However, the return on investment is not the only criterion to make a decision about an investment. ROI by itself does not consider the time duration and hence can become ineffective in comparing investments made over different time periods.
  • To overcome this, an investor needs to consider another metric called Annualized ROI.

    What is the Annualized ROI?

    This is a metric for the rate of return that gives the corresponding annual return an investor will receive over the given period. The advantage in this method of calculation is that the returns are scaled down for 12 months and hence investors can compare the returns of the investment over any period.

    However, you should understand that those investments which have a tenure of less than a year cannot be annualized.

    How to calculate annualized performance?

    The formula for calculating annualized performance is given by:

    A = ((P + G) / P) ^ (1 / n) - 1
    Where P = Initial investment or Principal
    G = gains or losses
    n = number of years
    A = annualized performance rate
    Net Present Value (NPV)

    Another term that is oft related to investment decisions is Net Present Value (NPV). This term considers the net value of money over time. This is an important aspect of investments because of the consideration of inflation.

    Thus, since NPV projects the real value of investment made while accounting for inflation, this metric is also called as the Real Rate of Return.

    Applications of Return on Investment (ROI)

    In real estate: Here the return on investment calculations decide many factors such as property taxes, rates of utility services. Besides, many factors such as whether the property is new, or second-handed or refinanced, etc. also are considered while determining ROI on real estate.

    Marketing investments: Most marketers use ROI as a metric to decide the budget allocation for marketing purposes. The ROI helps in determining whether a proposed marketing activity should be carried out or not.

    Sample Problems on ROI Calculation

    1. Mr. X invested INR 10000 in the shares of ABC company and after a year he sells the shares for INR 12000. What is his ROI?

    Solution:

    ROI = (Present Value of Investment – Initial Cost of Investment) / Initial Cost of Investment
    = (12000-10000)/10000
    = 2000/10000
    = 20%.

    Thus Mr.X’s investment in ABC shares earned him 20% returns.

    2. Suppose, Ms. B bought property for INR 500000 in 1990. In 2007, she sold it off for INR 800000.

    ROI = (Present Value of Investment – Initial Cost of Investment) / Initial Cost of Investment
    = (800000-500000)/500000
    = 300000/500000
    = 60%.

    Thus, Ms. B earned a 60% return on her investment in the property. Note that there is no consideration of time in the calculation at all. Which means this 60% may not be actually the 60% considering the future value of money.

    New to the future value of money concept? Learn more here.

    Patience is an investment. It yields a return called Success.

    How does CalculatorHut’s Return on Investment Calculator help you?

    Investment is a concept that is most confused and challenging for many people. Though everyone wants to put their money into work and gain handsome returns, often they can get confused in taking decisions because of lack of knowledge or clarity in dealing with calculations.

    Here’s where CalculatorHut’s wide range of finance calculators come handy. The website has many online free calculators related to finance which explain very clearly the related concepts along with their handy calculators. The main aim of CalcaultorHut is to make calculations easy and offer a handy calculator to every one.

    CalculatorHut’s Return on Investment calculator is one such tool that eases calculations concerning investments and the related returns. Just enter the amount invested, the amount returned and the duration. Click Calculate. You can see Investment Gain, ROI, Annualized ROI, and Investment Length in a jiffy. You can get this useful future value calculator as a widget too. It makes a great addition if you have a finance blog or website where you share about finance, investments, and money with your readers. Let us your customizations and style preferences and we would design it for free. Mail us at [email protected]

    Do you know we have an app too? Yes, you can download CalculatorHut app from Playstore and enjoy this wide range of online free calculators any time on the go! If you want any more calculator to be added, just drop us a word and we will be happy to design it and add to our library!

    Don’t miss to check our fantastic range of other finance calculators. Happy Investing!

    If you want to invest in something with minimum risk and a guaranteed big return, invest in yourself.

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